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TitleNews Online Archive

Former HOMS execs. 'fess up to fraud

September 25, 2002

SEC charges they deliberately lied to independent auditors

Inman News Features

Three former senior executives of Homestore today agreed to settle a lawsuit filed by the Securities Exchange Commission, plead guilty to criminal charges brought by the U.S. Department of Justice and cooperate with the government in its continuing investigation of an extensive scheme allegedly used last year to fraudulently inflate Homestore's online advertising revenues, according to statements issued by the SEC and DOJ this afternoon.

The SEC lawsuit filed today in the U.S. District Court in Los Angeles charged that former Homestore COO John Giesecke Jr., former CFO Joseph J. Shew and former VP John DeSimone caused the company to overstate its advertising revenues by $46 million—a whopping 64 percent—in the first three quarters of 2001.

The Justice Department's criminal information also filed today in the same court charged Giesecke and Shew with conspiracy to commit securities fraud, charged Giesecke also with wire fraud and charged Desimone with insider stock trading.

The SEC complaint alleged that Giesecke, Shew and DeSimone arranged fraudulent round-trip transactions for the sole purpose of artificially inflating Homestore's revenues to exceed Wall Street analysts' expectations. The defendants "circumvented applicable accounting principles and lied to Homestore's independent auditors" about the transactions at the same time that they exercised stock options at prices ranging from approximately $21 to $32 per share and reaped profits ranging from approximately $169,000 to $3.2 million, according to the SEC.

Statements issued today by the SEC and DOJ outlined how the transactions worked: Homestore in 2000 and 2001 engaged in a series of complex barter transactions designed to inflate revenues and meet Wall Street estimates. The essence of the transactions was a circular flow of money through which Homestore recognized its own cash as revenue, according to the SEC. Homestore then paid inflated sums to various vendors for services or products, and those vendors, in turn, used the funds to buy advertising from two media companies. The media companies then bought advertising from Homestore on their own behalf or as agents for other advertisers. Homestore recorded the funds it received from the media companies as revenue in its financial statements, in violation of applicable accounting principles, according to the SEC.

Homestore in the first two quarters of 2001 paid nearly $50 million to various vendors who paid $45 million to "a major media company" to purchase online advertisements. Homestore recorded $36.7 million in revenue from those transactions, in essence recycling its own money to generate revenues, according to the SEC, which also charged that the same scheme was used with another media company in the second and third quarters of 2001 to fraudulently recognize an additional $9.7 million in revenue. Neither the SEC nor the DOJ named the other companies involved in the transactions, but DOJ today said 16 vendors were involved and other news sources previously have reported that AOL was the unnamed major media company.

The SEC charged Giesecke, Shew and DeSimone with securities fraud, lying to the auditors, falsifying Homestore's books and records, and aiding and abetting Homestore's reporting and record-keeping violations. The complaint alleged that they knew the round-trip transactions had no economic substance and that Homestore paid cash to intermediaries for the primary purpose of selling advertising and recognizing revenue from these or related transactions, but they still carried out the fraudulent plan and recorded revenue on the bogus deals. The defendants lied to the company's independent auditors about the transactions and withheld business records from the auditors during their 2001 quarterly reviews, according to the SEC. Shew and Giesecke also misrepresented Homestore's revenues to securities analysts covering the company, while Giesecke approved press releases containing inflated revenue numbers, according to the SEC.

A statement from DOJ said: "...defendants Giesecke and Shew, together with high-ranking corporate officers at Homestore and others, participated in a scheme from about March 2001 to December 2001 to defraud investors and the SEC by manipulating Homestore's reported revenues to make them appear higher than they really were."

The DOJ charges alleged that the scheme was carried out by causing fraudulent entries to be made in the company's books and records, misleading the company's outside auditors about the existence of the fraudulent scheme and filing false financial statements with the SEC. It further alleged that the defendants and other high-ranking corporate officers at Homestore exercised stock options and sold stock in the company for their own benefit while they knew the company's revenues and earnings were fraudulently overstated.

Homestore late last year admitted to the irregularities and since then has restated its financial results and refiled its SEC reports to reflect the findings of an investigation by the company's board of directors' audit committee, consultants and outside accountants.